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Friday, October 26, 2007

Microsoft vs Countrwide: The Tale of Two Economies

CrappySlide reported earnings this morning. While the size of the loss wasn’t a surprise, it was surprising to hear the company predict a return to profitability in the fourth quarter. That I find hard to believe.

Countrywide Posts Loss as Borrowers Default on Loans (Update1): “Countrywide Financial Corp., the biggest U.S. mortgage lender, predicted a return to profit in the fourth quarter and for 2008 after its first quarterly loss in 25 years. The shares jumped more than 20 percent.

The loss of $1.2 billion, or $2.12 a share, compared with net income of $647.6 million, or $1.03 a share, a year earlier, the Calabasas, California-based company said in a statement today. The per-share figure excludes the effects of convertible preferred stock issued in the quarter.”

The short trade in CrappySlide is crowded, so today’s squeeze could last into Monday and Tuesday. The longer term chart is still Bearish.

Microsoft Surges After Sales, Profit Beat Estimates (Update2): “Microsoft Corp. shares soared to their highest level in six years after first-quarter sales beat projections by more than $1 billion, thanks to sales of the Windows Vista system and the ``Halo 3'' video game.

Microsoft, the world's largest software maker, rose $4.01, or 13 percent, to $36 in early trading after closing at $31.99 yesterday on the Nasdaq Stock Market. That's the highest price since July 2001, and would be the largest increase in seven years.”

Microsoft blew away earnings. Just like Apple, Research In Motion, Google and Intel. While a select handful of influential technology names continue to blow away expectations, the broader market continues to disappoint. How long can this divergence continue? It is definitely not healthy when anything related to finance and real estate, from the major money centre banks to home builders, continue to report rapidly deteriorating conditions while a select few technology companies, which ultimately rely on the same indebted consumers, continue to surprise to the upside. I do not believe this situation can resolve itself without a consumer lead recession.

Deutsche Bank Considers Participating in SIV Fund (Update2): “Deutsche Bank AG, Germany's biggest bank, may join an $80 billion plan backed by the U.S. Treasury to revive the commercial paper market, though “details aren't yet clear enough to make a final judgment,'' Chief Executive Officer Josef Ackermann said.””

Deutsche is considering joining the SIV bailout party. This isn’t much of a surprise, considering Deutsche is sitting on $46 billion in Deutsche Bank sponsored asset-backed commercial paper conduits… So you see, its in their best interest to sell some of their own ABCP to M-LEC at prices they determine so they won’t have the unpleasant experience of true price discovery in an open and transparent market place.

MBIA Plunges After Stock Buyback Halted, First Loss (Update3): “MBIA Inc., the world's biggest bond insurer, plunged the most in 20 years after the company reported its first loss, ended a share buyback and failed to quell speculation it will write down more of its mortgage portfolio.

The company today reported a $36.6 million loss after reducing the value of the securities it guarantees by $342 million. Chief Financial Officer Chuck Chaplin told investors the company will stop buying its shares because it needs to conserve capital, helping stoke concerns that more asset mark downs may be ahead.

MBIA, based in Armonk, New York, and Ambac Financial Group Inc., the world's second-largest bond insurer, both reported their first losses in the third quarter as the prices of mortgage securities they guaranteed declined. The insurers write derivative contracts promising to pay holders in the event of a default. The value of the securities plummeted after subprime delinquencies soared.”

The charts of bond insurers do not look pretty at all. Keep these guys on your radar. Should any of them fail and therefore not be able to make good on their insurance… well the unfortunate hedge or pension funds holding the insured junk will surely fly into a panicked rage as they are forced to eat sudden, unexpected losses.

How likely is bankruptcy? Fairly. Read more here and here. Take a look at the charts of MBIA and Ambac.

Japan's Consumer Prices Fall 0.1%; Production Slips (Update2): “Japan's consumer prices fell for an eighth month in September, led by flat-panel televisions and digital cameras, as deflation persists in the world's second- largest economy.

Core consumer prices, which exclude fresh food, dropped 0.1 percent from a year earlier, the statistics bureau said today in Tokyo. Industrial production slid 1.4 percent last month from a record in August, a separate government report showed.”

Ever since Japan’s own credit and real estate bubbles SIMULTANEOUSLY burst so many years ago AND their demographic tsunami of retiring baby boomers hit, they’ve been struggling ever so desperately to RE-INFLATE EVERYTHING. Instead equity prices AND real estate prices DEFLATED 90% from top to bottom and still failed to recover…

In the meantime, a Microsoft inspired tech rally and a Countrwide inspired short squeeze should result in a nice pop.


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